Aharvard prof. gave this problem to 400 harvard employees (many of whom had advanced degrees) and 250 wharton mbas. most got the answer wrong, so let's see how you do. you have $10,000 to invest in your 401-k plan. here are your only choices: morgan stanley s& p 500 index fund vanguard s& p 500 index fund schwab s& p 500 index fund fidelity s& p 500 index fund all four funds have the same one year, three year and five year returns. "life of fund returns" for each fund are as follows: morgan stanley = 12.5% vanguard = 11.9% schwab = 13.2% fidelity = 14.9% annual fees for each fund are as follows: morgan stanley = 36 basis points vanguard = 10 basis points schwab = 25 basis points fidelity = 27 basis points what is the best way to invest the $10,000?

3. saving two consumers, larry and jeff, have utility functions defined over the two periods of their lives: middle age (period zero) and retirement (period 1). they have the same income in period 0 of m dollars and they will not earn income in period 1. the interest rate they face is r. larry’s and jeff’s utility functions are as follow. = 0.5 + 0.5 and = 0.5 + 0.5 for each person is between zero and one and represents each consumer’s temporal discount econ 340: intermediate microeconomics. ben van kammen: purdue university. rate. a. write the budget constraint that applies to both jeff and larry in terms of consumption in each period and ), interest rate, and m. b. what is larry’s and what is jeff’s marginal rate of intertemporal substitution? c. what is the slope of the budget constraint? d. write each consumer’s condition for lifetime utility maximization. e. re-arrange the conditions from part (d) to solve for the ratio, . f. if > which consumer will save more of his middle age income? g. if > 1 1+ , in which period will larry consume more: = 0 or = 1?